fred smith summary

7/31/2019 Fred Smith Summary

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Capitalism and Its Ennemies

par Fred Smith (CEI)


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I. Introduction

II. The Schumpeter Question: Can Capitalism Survive?

A. Capitalism will succeed creating a middle class with most contented,two elite change forces (entrepreneurs, intellectuals)

B. Entrepreneurs: Seek out unmet needs, explore ways of meeting existing

needs more efficiently. Look for niches where economic freedom

survives. Nave and incompetent in political world tend to neglect or

(even worse) to become crony capitalists. Their class interest is

economic liberalism but they dont realize this.

C. Intellectuals: Conceptual thinkers, tend toward utopian goals,

discontented as a result, look toward the wealthy with resentment (If

were so smart and moral, then ), To the poor and are both fearful and

indignant: Call for collective action to create a fairer world. And, as the

narrative/framers of policy, they are well prepared to do this. Of course,

the growth of the state provides many advisory roles (slots for

intellectuals) both within government and within the private sector to

deal with these agencies). The intellectuals consciously or not recognize

that their class interest is statism. They craft the narratives that lead to

a world awash with anti-market narratives which leads to the slow de-legitimization of capitalism. Capitalisms positive elements become

accepted as foreordained; its shortfalls, as readily curable.

D. Business too often facing a growing state presence decides to switch

rather than fight to seek via political preference special privileges,

advantages they would not be entitled to in the competitive

marketplace. Of course, in a pervasively politicized world, one would

expect business to seek a reduction in the burden favoring them crony

capitalists goes further, seeking to harm its competitors.

E. The result a steady growth in the state, the steady decline in the private

share of the economy. Entrepreneurial capitalism fails.

III. But Schumpeter is far too gloomy


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A. Not all intellectuals become statists some are resistant to the

collectivist temptation.

B. Not all firms indeed, most --do not slip into crony capitalists

B.1. The Public Choice case for rent-seeking, crony capitalism is toosimplistic. It focuses on the gains from those succeeding in the negative

sum game of politics it ignores the reality that many who lobby receive

nothing (rent seeking is a lottery not an investment), that many who do

benefit do so only for short period of time (one rents politicians, one

cant buy them), that retention of such gains can become increasingly

costly (the Danegelt problem the Danes come back and back and ),

that overly attractive rent-seeking opportunities soon attract other

claimants that the gains are soon dissipated. Moreover, it fails to

recognize Schumpeters observation that businessmen are rarely

skilled at the game of politics.

B.2. Why then is crony capitalism so prevalent?

B.2.a) This is the primary role that business leaders crafted in the early

days of the collectivist era. The returns from seeking political

favor (the difficulties of extracting small fractions of the

entrepreneurial and managerial wealth created by non-crony

capitalists is much easier when that sector is dominant.)

B.2.b) Free market economists focused on explaining the growth of thestate and overly enamored of theoretical explanations have

failed to craft a positive-theory of the case for business seeking

economic liberalization.

B.2.c) The antipathy of most business leaders (and the demands

specifically of entrepreneurs) has led to their avoiding politics

save in its most simplistic forms (electoral politics, for example).

They have seen few cases where efforts for economic liberalization

have proved profitable again a charge against free market

intellectuals whove neglected examples (such as the Anti-CornLaw League) which were wealth-enhancing.


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B.2.d) Current academic programs that train future business leaders

rarely address the challenges of strategic profit-maximizing

behavior in the political world. That neglect understandable

when government was a small fraction of the economic sphere

was understandable when economy was largely private. It is

criminal today. Yet, the only political aspects of most MBA

programs are those concerned with business ethics or corporate

social responsibility both largely anti-market in orientation

B.2.e) Indeed, lacking any guidance from the academy and facing

widespread cultural criticisms, business has often adopted an

apologetic mea culpa approach. Often business leaders have

rushed to endorse the flawed Corporate Social Responsibilty

response.

(B.2.e.1) CSR is an infeasible and dangerous response.

(B.2.e.2) The responsible corporation as Milton Friedman noted long

ago should seek to maintain sustainable profitability, that is

maximize the firms return to the shareholders, the owners.

However, Friedman noted that this requires that the firm pay

attention to its extended shareholder community (that is, all

those interests having a potentially wealth-enhancing

relationship to the firm). These include not only the s

hareholders but also the firms suppliers, employees,

customers and even fence-post neighbors. All of these

interests can and should become allies of the firm in the private

AND THE political sphere.

(B.2.e.3) The firm is a specialized entity created to provide some good

or service efficiently and profitably. That specialization

provides the firm a metric, a guide star, to manage the complex

tasks of coordinating a work force, of resoving the difficult

principal-agent problems that beset all institutions. If the firm

accepts responsibility for the myriad concerns of society

(health, income disparities, environmental protection,

discrimination, poverty), it loses that metric. It becomes

ungovernable. In practice, CSR firms take a public-relations

approach, devoting some resources to some salient politically-

correct cause. This leads to further attacks, to further

disillusionment with capitalism.


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(B.2.e.4) CSR in effect blurs the line between the private world of

specialization and the political world of utopian aspirations.

Many capitalist critics seem equally critical of political agencies

their goal is not to destroy business but to transform it into a

more effective tool of social justice The government will steer,

business will row!

(B.2.e.5) CSR concentrates the firms resources moving them from the

various extended shareholders to top corporate managers.

This restricts the abilities of the extended shareholder

community (those who would have received those resources)

to advance the diversity of their values. Instead, the values of

CEOs (guided by their advisors) are determinate. Given the

infinite number of causes and concerns of a diverse population

(religious, arts, health, sports, poverty, health, arts,environment, etc of the citizenry, this means further discontent

as PC-causes gain priority over those of the people. CSR is anti-

democratic n a profound way.

B.2.f) Many business leaders might well still seek liberalization but are

fearful of retaliation by their regulatory and other political

overseers. Such fears are not without substance.

B.2.g) The continued dominance of the culture by anti-market

intellectuals means that business leaders receive little positive

media attention when they seek to fight back. Business CEOs like

most of us wish to be admired not likely given the anti-market

orientation of the media. Thus, many CEOs especially in the

managerial sector find greater gains from appeasement over

resistance or liberalization.

B.2.h) Non-crony capitalists (unlike their crony counterparts)have rarely

reached out for free market intellectual allies who could help

address these problems. More worrisome, free market

intellectuals have failed to reach out to the business community,

preferring to focus on the case for wealth redistribution by

business.


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C. Grounds for Optimism : The arguments indicating why crony capitalism

is so widespared suggest how we might begin to organize a pro-

liberalization effort that could gain business support. These include:

C.1. As government has grown, the costs of crony capitalism many born in

various ways by their competitors has grown also. There are many

more Battered Businesses today than in years past.

C.2. Public choice while it has failed to examine adequately the conditions

under which economic liberalization might succeed has documented

many cases of rent-seeking Baptist and Bootlegger alliances. Those

provide the templates for crafting wealth expanding alliances.

C.2.a) Even the left media and many citizens (even the Occupiers) have

become increasingly critical of crony capitalism (although there

remains too little appreciation of the virtues of entrepreneurialcapitalism). CEOs who publicly oppose rent-seeking now receive

more positive media attention.

C.3. The global financial crisis has made the slower growth, capital

misallocation, wealth dissipation and costs of crony capitalism less

viable. Were broke which may make politics more honest. As the late

economist Herbert Stein noted: When something cant go on forever, it

will stop!

C.4. There are now around the world an impressive array of economicliberal intellectuals who could and should play an important role in

outreach to business.

C.5. Business has come to realize that its strategies have and are failing.

Despite massive investments in traditional government and public

relations, attacks on business have proliferated. Some examples:

C.5.a) The right of business to defend themselves in the political arena is

increasingly viewed as questionable. McCain-Feingold and other

restrictions on political speech by business are justified asnecessary to Drive money out of politics! That politics is about

interest group struggles and that eliminating the economic

interests will leave those decisions in the hands of ideological

interests is not yet realized.


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C.5.b) Business experts are denied the right to participate in

governmental advisory groups determining the policies which will

determine the ability of the firm to survive.

C.5.c) Research and other analytic findings that have been in any way

funded by business are routinely dismissed as representing onlythe narrow self-interest of the firm. Results from government or

NGO sponsored research are seen as objective.

C.5.d) Business leaders are routinely subjected to demonization attacks

at Congressional hearings (show trials), to cow business into

submission.

C.5.e) The criminalization of regulatory violations even paperwork

violations and similar legal rules in other areas increasingly

means that business finds it necessary to plead guilty even whenthey believe themselves innocent.

C.5.f) Shareholder activist groups seek to force firms to dissociate

themselves from any potential ally. Examples include efforts to

force firms to withdraw their membership form the Chamber of

Commerce, the American Legislative Exchange Council, along with

numerous pro-market policy groups.

C.5.g) If these attacks are successful, the only interest groups which will

influence future policies will be ideological. History does notsuggest that narrowing the democratic process in this way will

lead to human progress.


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C.6. Business has massive resources but few are employed in seeking

economic liberalization. Business has focused on entrepreneurial

opportunities almost solely in the private sphere neglecting similar

opportunities in the half of the economy now dominated by politics.

Were they to extend their private efforts to the political sphere (for

example, by using their communiqus to Joe and Joan Consumer to

reach Joe and Joan Citizen) as well as crafting narratives clarifying their

social as well as self-interest private value they might better employ

their extended shareholder resources (suppliers, employees,

customers, shareholders, and fence-post neighbors) to gain the societal

legitimacy they merit.

C.7. Perhaps, most importantly, the examples of non-growth economies that

have blossomed in recent decades (China and India, Singapore) provide

examples of the CEI slogan: One doesnt need to teach the grass to grow simply move the rocks off the lawn! The task of economic

liberalization has value even if only partially successful.

D. The Challenge

D.1. Classical liberal groups should outreach to the business community far

more aggressively helping them in effect to sober up.

D.2. Pro-growth business leaders have taken a very limited view of the role

of their free market intellectual allies:

D.2.a) Some business leaders regard our groups in a fashion akin to the

way that the religious businessman regards his church. He

attends, tithes and may well agree to chair the building fund.

However, he sees no link between his belief world and his daily

business world.


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D.2.b) Other business leaders typically at the mid-level of the

corporation who are responsible for fending off costly political

attacks seek out our groups. However, they do so in a tactical not

strategic fashion (note: that mid-level business executives have

limited influence over strategy). This group The Battered

Businessman may well become a useful ally BUT ONLY ON THAT

SPECIFIC POLICY FIGHT. Once the issue has calmed whether won

or lost they again forget about our groups. Moreover, officials at

this level often move to other firms, to other positions within the

firm where they cannot help our groups. This leads to short-term

alliances which cannot address the strategic long term problem

facing capitalism and business.

D.3. The challenge is to seek out CEOs who recognize and appreciate the role

of strategic long term allies.

D.3.a) CEOs must become aware that theyve neglected investment

opportunities in the political sphere not to gain rents, but rather

to gain legitimacy.

D.3.b) Once they do so, they must address the significant coordination

challenges of ensuring that all subgroups work together to both

increase sales and enhance efficiency (increase the profit potential

in the private sphere) but also gain legitimacy (improve the

prospects for economic liberalization of their operating

environment, reduce their vulnerability to further political

predation).

D.3.c) CEOs must also reflect on the success of statist rent-seekng/NGO

alliances and explore the possibility of creating similar wealth-

creating alliances.

D.4. We have the intellectual arguments and could acquire the

communication skills to help them reach the citizenry in their

respective political jurisdictions. Were we to gain their cooperation, wecould craft value-based narratives that could reach the citizen (and,

thus, escape the anti-market filters that now block such efforts via the

media and academic channels) that could counter the anti-market

narratives that now dominate global political debates (and that largely

dominate too many elements of the larger corporations).


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